The economics of relationship selling are changing, and that means distributors must change, as well. This article – part 2 in a series on the role of the distribution sales rep – examines that change and paints a picture of the future of field sales, including its role, function and purpose for the successful distributor. Part 1 examined what’s driving the shift and why distributors should act.
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Many of the tasks performed by distribution field sales reps today could be handled just as well, if not better, by another role in the company. But the legacy of self-directed field sales reps has created a gorilla in the room. It has become expensive and motivated by volume, which perpetuates the desire for self-direction and independence.
While it may have worked in the past, changes in the industry and in how customers buy have forced distributors’ hands. There are far more options for where to make purchases, and the cost to change has significantly declined for many product lines. It is time to evolve the role of field sales to one that is more responsive to customers’ needs.
Consider these two major factors when trying to understand the gorilla and the consequences of ignoring it: critical selling events and the changing economics of relationship selling.
Market-makers or market-servers?
Customers tend to be comfortable with their buying processes. If you keep meeting their expectations, they’ll likely stick with you. In a research project we conducted for Heating, Air-conditioning and Refrigeration Distributors International in 2014, we found that end users purchased 89 percent of their products from the same source they had in the previous year.
The research project was undertaken to determine if distributors created demand – and if so, how. Manufacturers held the prevailing view that distributors were actually market-servers rather than market-makers.
We asked end users about the length of their supplier relationships, purchase concentration and the circumstances in which they would choose to switch suppliers or products. Our findings disrupted some long-standing assumptions.
Many in the industry believed good distributors were market-makers, creating demand by getting their customers to switch products. But the results said otherwise. Of the 11 percent of purchase sources changed, only 2 percent were due to a sales rep providing a better solution. Nine percent were switched because of the incumbent supplier’s failure in product or service. (Values are dollar-weighted.)
We termed a switch due to a supplier failure (the 9 percent) a critical selling event (CSE). A CSE is completely outside the control or influence of a sales rep. If the rep is one of the end user’s existing suppliers and a competitor experiences a CSE, the rep can intercept the opportunity. But he or she isn’t the disruptive force driving that change.
We also did a detailed activity-based costing analysis of multiple distributors to see how they allocated their resources. Distributor cost structures were generally aligned with how their customers chose to source products. We found that 40 percent of a distributor’s costs were invested in customer-facing activities. When we mapped distributor sales activities to cost in a separate and parallel work flow, this 40 percent was divided into 27 percent protecting and servicing existing business, 10 percent intercepting service failures from competitors and only 3 percent disrupting a happy customer with a better solution.
That 3-percent slice is where all manufacturers compete for the distributor’s attention.
Our expensive, aging generalist sales rep wins by taking care of customers so they never experience a CSE. And they wait on the bench for an opportunity to save the day when a competitor experiences a CSE that they can intercept. While most people still spend most of their time in joint sales calls and promotions with suppliers, the data indicate that effort really only moves the revenue in low single digits on an annual basis.
This certainly doesn’t fit the stereotype of the hard-charging, objection-overcoming persuasive individual that aggressively converts customers from cold calls. But that doesn’t stop distribution sales executives from ignoring the data, saying that their markets are different.
The strategic foundation of almost all distribution businesses is customer intimacy, not product or cost leadership. When this is deployed, the dominant style of selling is termed relationship selling, i.e., selling yourself first. The biggest cause of the gorilla in the room is the changing economics of this relationship selling.
In distribution, the field sales rep and the customer have different interests and asymmetric information. The sales rep, for example, likely has more information about products, competition or supply chains than the customer does. Because of this, the customer cannot directly ensure that the sales rep is always acting in the customer’s best interest, particularly when activities, such as lower prices, may be costly to the rep.
In economics and political science, this is referred to as the principal-agent dilemma. While this might sound academic, it is the foundation of relationship selling in distribution. Each side had asymmetrical
information, and there was economic parity. Given the high repurchase rate, the sales rep wouldn’t make a recommendation to the customer that would jeopardize the ongoing economic value of the relationship.
Both sides knew this and, as a result, there was a strong economic basis for trust. The customer needed two things: a reliable source of supply and products that met quality requirements. The rep would move heaven and earth with heroic service if there was an issue with these two performance criteria.
Price was a distant third consideration – but it was a consideration. Because of the established trust, the preferred distributor would be the first call when a new product was required. The sales rep was at risk in the relationship if the customer found out that the provided pricing was not competitive or at market.
Several things are disrupting the stability of this economic relationship, including:
- The ongoing race to the bottom on pricing, which is putting significant pressure on the customer to find ways to lower cost.
- Improvement in supply chain efficiency over the past decade, reducing the need for personal heroic recoveries.
- Continued industry consolidation at the customer, distributor and supplier levels and the expanded influence of the internet, creating significant pressure for a transition to rules-based procurement and replacing the value of the personal trusting relationship.
- The internet replacing the field sales rep as the customer’s source for new product or application information.
These forces of change are not going away. Rather, they are growing in magnitude. There is emerging evidence that relationship selling is being replaced by “rabbits and advantaged players.” In other words, the incumbent rep is placed in a room with competitors and everyone is told that there is one shot to get the business. And ultimately it is all about price.
B2B distribution markets and channels continue to change. Does this mean that the field sales rep is going to go away? If firms fail to respond to these forces, the answer is yes. It will fade because it is costly and ineffective in the new market environment.
Small distributors that maintain the traditional model will lose their large customers because they won’t be price competitive and the service they offer ceases to have differentiating value. Traditional distributors will find themselves with a shrinking available market, serving small customers as lifestyle businesses.
The sales rep of the future
The bottom line for the distributor field sales rep of the future is that they will continue to be critical to success and well paid, but the role will be very different from where it started. Fundamentally the transition is from being a self-directed generalist to a management-directed specialist.
Some firms are already well on their way, and many are not the publicly held billion-dollar firms. They are privately held regional distributors that are making the transition quietly.
Look for these behaviors or practices in these firms:
They are transitioning from generalist field sales reps to specialists and adding inside customer service reps, inbound and outbound telephone sales, product specialists and quotation departments that narrow the responsibility of the field sales rep. The role that remains is focused on new business development and demand creation.
They are adding real marketing functions that identify new business opportunities, creating clear value propositions that make customers sticky by increasing their switching costs and building a playbook of value-added service offerings. The responsibility of identifying growth opportunities shifts from the field sales rep to the marketing department.
The field sales reps are shifting away from servicing their existing book of business, as that business transitions to lower cost and higher efficiency alternatives.
The field sales rep is doing what the senior sales executives thought they were doing from the start: They are conducting needs analyses for customers, documenting real customer cost savings and disrupting the old-school traditional reps by taking their customers away.
They no longer are defined by a set of assigned customers that largely remain unchanged. They have customer-recognized experts in product selection and application, specific markets or specific business challenges.
Fear often holds distributors hostage to the old model. There may be significant risks when making this kind of change, but the risks of not changing may be larger. And not every company is prepared to succeed. It starts with acknowledging the gorilla in the room and taking steps to deal with it.
In a future article, we will discuss how to chart and transition to a new sales model without blowing up your existing business.
Join us for the first-ever Sales GPS event March 1-2, 2017, in Austin, TX, to learn how to apply these lessons to your own business and start the process of transforming your sales force. Learn more at SalesGPS2017.com.
Mike Marks is managing director of Indian River Consulting Group and specializes in helping distributors and manufacturers accurately diagnose problems and identify risk-bound alternatives so they can take their next steps confidently. Call IRCG at 321-956-8617 or visit ircg.com.